THE CHARACTERISTICS OF MODERN ECONOMIC GROWTH REVISITED

Stephen Broadberry

Nuffield College, Oxford

stephen.broadberry@nuffield.ox.ac.uk

4 February 2016

File: ModernEconomicGrowth6a

Abstract: This paper revisits the work of Simon Kuznets on the characteristics of modern

economic growth. Using new quantitative evidence on the process of growth and

development reaching back to the medieval period, six new characteristics of modern

economic growth are derived inductively. The most important changes from Kuznets concern

the incorporation of new work on: (1) growth reversals (2) demographic transition (3)

structural change and services (4) institutional change and the state (5) market integration and

(6) the Great Divergence.

JEL classification: N10, N30, O40, O47, O57

Key words: Modern economic growth, growth reversals, demographic transition, institutional

change, Great Divergence

Acknowledgements: I am grateful to Neil Cummins, Martin Ellison, Leigh Gardner, Chris Meissner, John Wallis and seminar participants at Oxford and Southern Denmark Universities for helpful discussions and advice.

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I. INTRODUCTION

When Simon Kuznets set out to define his famous six characteristics of modern economic

growth in his Nobel memorial lecture in 1971, he was able to draw on only a very limited

amount of quantitative information concerning growth before the mid-nineteenth century.

Indeed, the estimates of national income that he set out in Kuznets (1966: 64-65) contained

information before 1850 for just 3 economies (Great Britain, the United States and France)

and before 1839 only for Great Britain, reaching back even then only to 1700. This is

potentially problematic, because Kuznets was attempting to distinguish modern economic

growth from pre-modern growth, and he associated modern economic growth with an epoch

beginning in the mid-eighteenth century. This paper revisits the conditions set out by

Kuznets, drawing on recent work in historical national accounting, which has greatly

expanded coverage of the pre-1850 period, reaching back to the medieval period.

Although this paper changes the characteristics of modern economic growth, it retains

the methodological emphasis of Kuznets on arriving inductively at the conditions of sustained

economic growth, drawing on the best information available at the time. Although the

inductive approach was already falling out of favour in economics when Kuznets was

writing, the financial crisis of 2008 has led some to call for a reappraisal. A more inductive

approach has begun to reappear in macroeconomics and financial economics, where over-

reliance on introspection and a deductive approach had allowed economists to screen out the

possibility of such a catastrophic occurrence (Wolf, 2014). As Taylor (2015) notes, within

this literature, new empirical findings from economic history have emerged, which can

strengthen arguments beyond a reliance on introspection and the deductive approach alone.

The time is now ripe for a similar reconsideration in the area of economic growth and

development, where a substantial amount of research in economic history has uncovered

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many interesting findings about the experience of the last millennium and the transition to

sustained economic growth.

The paper proceeds as follows. Section II sets out in summary form the characteristics

of modern economic growth as identified by Kuznets. Section III then considers those

characteristics in the light of recent findings by economic historians covering the period

before the Industrial Revolution and during the transition to modern economic growth.

Section IV provides a revised set of six characteristics of modern economic growth, while

Section V concludes.

II. KUZNETS AND THE CHARACTERISTICS OF MODERN ECONOMIC

GROWTH

Kuznets (1966: 490-500) first set out a list of the characteristics of modern economic growth

at the end of a book which summarised what was then the latest available quantitative-

historical evidence of economic development. At this stage, Kuznets listed fifteen

characteristics, which were derived inductively from the historical evidence presented in

chapters 2 to 9. When he came to deliver his Nobel memorial lecture, however, Kuznets

[1971] refined this longer list into the famous “six characteristics”, falling into three main

groups, concerning aggregate growth (conditions 1 and 2), structural transformation

(conditions 3 and 4) and international spread (conditions 5 and 6). Here we list the six

characteristics in summary form before considering them in the light of subsequent research

in long run quantitative economic history in the next section.

A. Aggregate growth

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1. High rates of increase in per capita product, accompanied by substantial rates of

population growth

2. High rates of increase in output per unit of all inputs

B. Structural transformation

3. A high degree of structural transformation, encompassing a shift from agriculture to

industry and services

4. Changes in the structure of society and its ideology, including urbanisation and

secularisation

C. International spread

5. Opening up of international communications

6. A growing gap between developed and under-developed nations

III. RECENT FINDINGS FROM LONG RUN ECONOMIC HISTORY

Kuznets [1971] was writing with a very limited evidence base on the transition to modern

economic growth. At that time, there were no reliable quantitative accounts of the process of

development amongst the developed countries of the 1960s. As a result of recent

developments in quantitative economic history, we now have a much firmer idea of what

happened before and during the Industrial Revolution and the transition to modern economic

growth.

We now have estimates of GDP, population and GDP per capita reaching back to

medieval times for a number of countries, covering a large share of world GDP and

population. The first steps were taken with the publication of Angus Maddison’s (2001), The

World Economy: A Millennial Perspective, However, the pre-1820 data in that volume are

available only for a small number of benchmark years and are best described as “controlled

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conjectures” rather than drawn from archival evidence. Stimulated by Maddison’s work,

however, economic historians have recently begun to produce estimates of per capita income

in a national accounting framework for the medieval and early modern periods, utilising

evidence collected at the time. This is possible because medieval and early modern societies

were more literate and numerate than is often supposed, and left behind a wealth of records

from which quantitative data can be extracted.

For some European countries, abundant historical information has survived so that

historical national accounts can be constructed on a sectoral basis at an annual frequency

back to the late thirteenth century. The data for Britain and Holland are particularly rich,

building on well-stocked archives and decades of work by generations of scholars processing

their contents (Broadberry et al., 2015a; van Zanden and van Leeuwen, 2012). For Italy and

Spain, where information is more limited and there has been less processing of the available

data, Malanima (2011), Álvarez-Nogal and Prados de la Escosura (2013) and others have

developed a short-cut method for reconstructing GDP per capita, estimating agricultural

output from data on wages and prices via a demand function for food and non-agricultural

output from the extent of urbanisation. The short-cut method has been used by Prados de la

Escosura (2013) for Britain and Holland, and produces similar results at the aggregate level,

thus providing as useful cross-check, although the direct method is to be preferred, since it

produces a much fuller picture of the economy.

Following Maddison (2010), these estimates are expressed in terms of 1990

international dollars, so that comparisons can be made across both space and time. Maddison

thought of a GDP per capita level of $400 as equivalent to most people living at bare bones

subsistence, or the World Bank poverty level of $1 per day, together with a small but rich

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elite. This section discusses the findings of this and other related quantitative research, which

provides the basis for a revised set of characteristics of modern economic growth.

1. High rates of increase in per capita product and substantial population growth

A problem with the first characteristic set out by Kuznets is that further research in economic

history has shown that growth rates were not as fast as once thought during the early stages of

modern economic growth (Crafts, 1985; Crafts and Harley, 1992). Indeed, what has become

apparent as a result of new quantitative work on economic growth reaching back to the

medieval period is that the transition to modern economic growth required not so much faster

growth in periods of positive economic growth as the elimination of periods of negative

economic growth (Broadberry, 2015). In other words, it was crucial that the economy should

stop shrinking during slumps rather than that it should grow faster during booms. The net

effect of the same rate of economic growth during booms, combined with the absence of

growth reversals during slumps, was a trend increase in the level of per capita income, slow

at first, but gradually gathering pace. During the early years of the Industrial Revolution,

there was revolutionary change only in a qualitative sense, but not yet in a quantitative sense.

A second issue that arises in connection with the first characteristic of modern

economic growth concerns Kuznets’s treatment of population growth. The insistence by

Kuznets that high rates of per capita product growth should be accompanied by substantial

rates of population growth was intended to distinguish modern economic growth from earlier

episodes of pre-modern growth, where a mortality crisis such as that following the arrival of

the Black Death in the mid-fourteenth century was believed to have raised per capita incomes

temporarily. This is the classic Malthusian response to a sharp drop in the population, which

makes survivors better off, because they have more land and capital. These gains are then

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eroded by subsequent population growth, so that there is no sustained increase in living

standards. However, the emphasis by Kuznets on high rates of population growth as a

characteristic of prosperity was already beginning to seem problematic by the time he was

writing, since the demographic transition had by then slowed population growth in the West

and excessive population growth was increasingly being seen as a cause of poverty in less

developed nations.

Kuznets (1966: 40-50) did allude to the decline of birth rates in the West and to the

difficulties facing underdeveloped countries since World War II (Kuznets, 1974b). However,

this stopped a long way short of a comprehensive discussion of the need for a demographic

transition. This will seem surprising to anyone familiar with unified growth theory, which

distinguishes between a post-Malthusian regime, combining high rates of per capita income

growth with rapid population growth, and a regime of modern economic growth, combining

rapid per capita income growth with slowly growing or stable population after a demographic

transition (Galor, 2005).

A. Ending growth reversals

The data in Table 1 show the trends in GDP per capita for four European countries, indicating

a reversal of fortunes between the North Sea area economies of Britain and Holland and the

Mediterranean economies of Italy and Spain. Before the Black Death struck in 1348, wiping

out between a third and a half of Europe’s population, per capita incomes were substantially

higher in Italy and Spain than in England and Holland, but by 1750 on the eve of the

Industrial Revolution, Britain and Holland were clearly ahead. The annual data in Figure 1

shed light on this process of overtaking, sometimes known as the Little Divergence. In Figure

1A, there is clearly an alternation between periods of positive and negative growth in Italy

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and Spain, with growth booms typically followed by growth reversals, leaving little or no

progress in the level of per capita incomes over the long run. In Figure 1B, by contrast,

although there are alternating periods of positive and negative growth, which last until the

eighteenth century, there is also a clear upward trend, with the per capita income gains

following the Black Death being retained, and the growth reversals eventually disappearing

with the transition to modern economic growth. Putting the two regions together in Figure

1C, Britain and Holland overtake Italy in Spain as a result of the dampening of growth

reversals rather than any increase in the annual rate of growth during periods of positive

growth. This suggests that in understanding the transition to modern economic growth, it is

more important to understand the ending of growth reversals than the beginning of growth

booms, on which most attention has usually been focused.

There is now a substantial literature on the importance of growth reversals in the post-

World War II period. Easterly et al. (1993) have highlighted their importance in explaining

the combination of, on the one hand, high persistence in comparative levels of GDP per

capita across countries and, on the other hand, high variability in growth rates over time.

Pritchett (2000) uses a topographical analogy to describe the difference between those

countries that have made the transition to modern economic growth and those that have not.

Modern economic growth is a “continuous hill” and getting there is the final stage of a

dynamic process, which involves dampening growth reversals. This approach can be applied

equally to the medieval and early modern world, now that annual data are available for these

periods.

Returning to Figure 1B, although British GDP per capita followed a “hill” pattern

during 1348-1400, as population declined catastrophically after the arrival of the Black

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Death, it was followed not by a decline, but rather by a “plateau” between 1400 and 1650.

British GDP per capita again followed a hill pattern after 1650, but this time the hill turned

out to be continuous. However, it was not yet modern economic growth on the Kuznetsian

definition, because population declined between 1650 and 1700. With the end of population

decline from around 1700, GDP per capita continued to grow, as Britain became the first

country to make the transition to modern economic growth.

By contrast, the growth paths of Italy and Spain in Figure 1A may be described as

tracing out a series of “mountains”, where a long period of positive trend growth was

typically followed by a long period of negative trend growth. Examples would include the

period of positive trend growth in Italy between the 1370s and the 1420s, followed by a

period of negative trend growth between the 1420s and the 1490s, and the period of positive

growth in Spain between the 1460s and the 1590s, followed by the period of negative trend

growth between the 1590s and the 1680s. Sometimes, where the periods of positive and also

negative growth were relatively short, the growth path traced out a “steep mountain” pattern.

Examples would include Spain between 1645 and 1664 and Italy between 1346 and 1374.

B. Demographic transition and human capital

Kuznets (1966) was keen to distinguish modern economic growth from pre-modern growth

by ruling out episodes such as the rise in GDP per capita that occurred across much of Europe

following the Black Death of the mid-fourteenth century. Whilst it seems reasonable to rule

out cases of per capita GDP growth at a time of falling population, it is not so clear that

substantial population growth should be required. Indeed, as noted earlier, this emphasis on

positive population growth sits uneasily with the observation that in the twentieth century,

poverty has become associated with excessive population growth. By contrast, continuing

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prosperity is associated with the idea of a demographic transition, from a world of high birth

rates and death rates to a world of low birth rates and death rates.

The classic pattern of the demographic transition is illustrated in Figure 2A by the

case of Sweden during the period 1735-2000. The crude death rate (the number of deaths per

1000 of the population) began to decline from the mid-eighteenth century, but the decline of

the crude death rate (deaths per 1000) was delayed until the 1870s. As a result, Swedish

population growth accelerated between the 1750s and 1870s before falling back. However,

the classic Swedish pattern, which would have been known to Kuznets, was far from

ubiquitous. The case of England, where the first transition to modern economic growth

occurred, shown here in Figure 2B, deviates significantly from this pattern. Although there

was a substantial increase in population growth between the mid-eighteenth and mid-

nineteenth centuries, approximately two-thirds of this arose from an increase in fertility rather

than a decline in mortality. The quantitative dimensions of this case were only established

with Wrigley and Schofield’s (1981) work, and did not undermine the idea of an acceleration

of population growth during the demographic transition. The case of France, shown in Figure

2C, is different again, in a more significant way for Kuznets’s first characteristic of modern

economic growth. In France, fertility and mortality declined together from the late eighteenth

century, so that population growth rates remained low throughout the nineteenth century. The

French case thus makes clear that there is no need for substantial rates of population growth

during the transition to modern economic growth, even if such an association existed in the

cases of England and Sweden.

2. High rates of increase in output per unit of all inputs

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Growth rates of TFP, as well as GDP per capita, were not very high during fist transition to

modern economic growth, as made clear by Crafts and Harley (1992). The growth of capital

per worker was limited, as the capital stock barely kept pace with the rapid population

increase, while including human capital as a factor input tends to lower TFP growth rates still

further.

A. Capital and the Industrial Revolution

Little was known about the capital stock when Kuznets was writing, but for a limited number

of economies, there are now have reliable estimates. For Great Britain, Feinstein’s (1988)

estimates back to 1760 have been produced using the perpetual inventory method, ensuring

consistency between the stock of capital and the flows of investment. Crafts and Harley

(1992) showed that TFP growth rate was not particularly high during the Industrial

revolution, using Feinstein’s (1988) estimates of the capital stock, together with their own

estimates of output and the assumption that the labour force grew in line with population. In

their estimates, shown here in Table 2, capital and labour are given equal weights. These data

suggest that only one-third of the acceleration in output growth between the early eighteenth

and mid-nineteenth centuries was due to faster TFP growth, with two-thirds of the increase

being accounted for by faster growth of factor inputs. Furthermore, most of the TFP

acceleration was delayed until after 1830. A good part of the increased input growth was due

to labour, as a result of the rapid rate of population growth, hence leading to only a slow rate

of per capita GDP growth. With capital growing a bit faster than labour, TFP growth was

slower even than GDP per capita growth.

B. Human capital and TFP growth

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Crafts’s (1995) later TFP calculations also take account of human capital. This may not have

been particularly important during the early stages of the Industrial Revolution, with literacy

rates stagnating during the second half of the eighteenth century (Schofield, 1973). In Table

3, the traditional growth accounting uses equal weights of 0.5 for capital and labour, while

the human capital-augmented Solow growth accounting uses weights of 0.4 for capital, 0.35

for labour and 0.25 for human capital. Comparing panels A and B of Table 3, TFP growth

rates are reduced for all periods apart from 1760-80, when human capita is included as a

factor input.

Estimates of TFP growth for Holland are provided by van Zanden and van Leeuwen

(2012), reaching back to 1540 and including human capital as well as labour and capital

inputs. In Table 4, Dutch TFP is estimated using the same weights as those used by Crafts

and Harley (1992) for Britain (0.4 for capital, 0.35 for labour and 0.25 for human capital).

These estimates differ only very slightly from those of van Zanden and van Leeuwen, who

also include land as a fourth factor input. The period of fastest TFP growth was 1540-1620,

during the Dutch Golden Age, at 0.64% per annum. This was higher than at any other time in

Holland during the seventeenth and eighteenth centuries, or in Britain during the eighteenth

and nineteenth centuries. However, this period of positive TFP growth was followed by a

period of strongly negative TFP growth between 1620 and1665, and barely positive TFP

growth thereafter, so there was no trend increase in TFP over the period 1540-1800 as a

whole. The Dutch example thus serves as a reminder that growth reversals can occur in TFP

as well as GDP per capita, and that the transition to modern economic growth requires an end

to TFP growth reversals as well as GDP per capita growth reversals.

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The overall message to take away from this section on output per unit of all inputs is

that Kuznets placed too much emphasis on TFP in the transition to modern economic growth,

which actually occurred against a backdrop of slow TFP growth. McCloskey (1981: 108),

believing in the faster rates of output growth suggested by Deane and Cole (1967), and hence

in a much larger Solow residual or TFP growth, wrote “ingenuity rather than abstention

governed the industrial revolution”. More reliable recent data suggest that the industrial

revolution was governed more by abstention or thrift (savings = investment) and hard work

(growth of labour supply) than by ingenuity (growth of TFP). What really seems to have

changed was the elimination of phases of negative growth rather than anything fundamental

during the phases of positive growth.

3. A high degree of structural transformation, encompassing a shift from agriculture to

industry and services

Although Kuznets (1966: 86-113) discussed the structural transformation from agriculture to

both industry and services, he clearly placed more emphasis on industrialisation in bringing

about the transition to modern economic growth. This was in line with the views of Colin

Clark (1960), who saw services as playing an important role in economic activity only much

later in the process of development, after industrialisation had already occurred. This playing

down of the role of services had some adverse consequences for the interpretation of

economic history. First, it led to a neglect of the role of services during the British Industrial

Revolution, despite a number of extraordinary commercial aspects of the rise of the British

cotton textile industry, such as securing a supply of raw cotton from overseas in a country

where no raw cotton was grown, while at the same time transporting and distributing huge

volumes of yarn and cloth all over the world, and financing the whole dynamic enterprise.

Only quite recently have economic historians begun to focus on these aspects of the British

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cotton industry (Chapman, 1992; Farnie, 2004). Second, it led to Holland being perceived as

a lagging industrial economy rather than as a rich and successful economy with a highly

dynamic service sector, which played a key role in Europe’s Little Divergence, as the North

Sea area overtook Mediterranean Europe (de Vries and van der Woude, 1997; van Zanden

and van Leeuwen, 2012).

It is also worth noting that the shift of labour from agriculture to industry and services

was more gradual than implied by Kuznets’s suggestion of a “high degree” of structural

transformation. Table 5 from Broadberry et al. (2015a) shows that in Britain, services already

accounted for more than 20 per cent of employment during the late medieval and early

modern periods, rising to around 30 per cent by the start of the Industrial Revolution. Table 5

also establishes that the shift of labour from agriculture to industry and services began much

earlier than once assumed, with agriculture accounting for less than 60 per cent of the labour

force as early as 1381. This is also in line with the findings of Clark (2013), who

independently derived his estimates from the poll tax returns for that year. With agriculture

accounting for less than 40 per cent of the labour force by the early eighteenth century, the

scope for redeployment of labour from agriculture to industry during the Industrial

Revolution was quite limited. Combined with the relatively slow rate of industrial output

growth established by Crafts and Harley (1992), these new employment data avoid the

problem which had plagued the work of Deane and Cole (1967) as well as Crafts and Harley,

that labour productivity growth appeared to grow more rapidly in agriculture than in industry

during the Industrial Revolution.

4. Changes in the structure of society and its ideology, including urbanisation and

secularisation

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In his discussion of changes in the structure of society and its ideology, Kuznets seems to

have been groping towards what economic historians today would call institutional factors.

Here, work has tended to be split between those emphasising the need to build up state

capacity to provide essential public goods and those who emphasise the need to impose

constraints on an over-mighty state. On one side of the debate, Epstein (2000) argues that

state power was fragmented in the medieval period, with market integration hindered by the

“freedoms” granted to interests such as towns and guilds, so that what was needed for growth

in the early modern period was centralisation of state power and expansion of state capacity

rather than constraints on the executive. This view is supported by O’Brien (2011), who

attributes Britain’s success to the rise of the “fiscal state”. On the other side of the debate,

Acemoglu, Johnson and Robinson (2005), drawing on the approach of North and Weingast

(1989), explain the success of Britain and Holland after 1500, together with the failure of

Spain and Portugal, through institutional constraints on executive power. In Britain and

Holland at this time, constraints on the executive are seen as sufficient to ensure that rulers

were unable to act arbitrarily in their dealings with merchants. In late medieval and early

modern Spain and Portugal, by contrast, states are characterised as being sufficiently

powerful to prevent the merchant class from constraining their ability to intervene in business

matters.

The two views can be reconciled once it is recognised that a balance is needed

between having a state that is strong enough to enforce property rights but not so strong that

it can appropriate all the gains from trade. Indeed, Dincecco (2011) argues convincingly on

the basis of Europe’s experience between 1650 and 1913 that what was needed for economic

development was the establishment of a regime that was both fiscally centralised and

politically limited. Fiscal centralisation was needed to ensure that the state had sufficient

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capacity to provide public goods such as education and transportation infrastructure, while

parliamentary control was necessary to ensure that the public revenues were spent effectively

and that the state did not hinder the processes of private wealth creation. North et al. (2009)

call such a society an “open access order”, as opposed to a “limited access order”, where

access to rents is restricted to a small elite.

There is empirical evidence to back up the importance of the expansion of both state

capacity and parliamentary control in the European Little Divergence. Early modern Britain

and Holland dominated Spain and Portugal in terms of both the ability of the state to raise

taxes that allowed for an expansion of state capacity and the control exercised by mercantile

interests over the state through parliament. Table 6 on the ability of the state to raise fiscal

revenue per capita shows a pattern of divergence between northwest Europe and the rest of

the continent during the seventeenth and eighteenth centuries, with England and the Dutch

Republic forging ahead. Table 7 shows very different patterns of parliamentary activity in the

North Sea area and Mediterranean Europe from the twelfth to the eighteenth centuries. The

index of parliamentary activity constructed by van Zanden et al. (2012) is based on the

calendar years per century in which parliament met. During the first half of the second

millennium, Parliamentary activity was higher in Spain and Portugal than in the North Sea

area. However, activity then peaked in the fifteenth or sixteenth century in Spain and Portugal

before going into decline. In the North Sea area, by contrast, although parliamentary activity

was slow to get going, it continued to increase after 1500, reaching very high levels during

the seventeenth and eighteenth centuries.

5. Opening up of international communications

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The phrase “opening up of international communications” carries with it overtones of

globalisation and the free movement of goods and factors of production. However, Kuznets

(1966: 349) noted that this only really applied to the period between the second quarter of the

nineteenth century and the outbreak of World War 1 in 1914. After 1914, these trends were

interrupted during and between the two world wars, and the return to globalisation after 1950

was at first quite limited. Before the 1830s, the transition to modern economic growth

occurred during a mercantilist era, when all countries were pursuing a protectionist doctrine

and free trade was not a realistic option (Findlay and O’Rourke, 2007). In the mercantilist

era, state power was needed to guarantee the security of merchants, and success in

international trade was underpinned by state power. This suggests that it may be better to see

the transition to modern economic growth as depending on access to a sufficiently large

market, which may be a result of the opening up of international communications, but may

also be due to integration within a large domestic market behind protectionist barriers or

integration within an empire through mercantilist restrictions.

Figure 3, from O’Rourke and Williamson (1999), shows a substantial narrowing of

grain price differences between the United States and Britain between 1870 and1913. This is

usually seen as evidence of the growing integration of global markets during the high period

of globalisation. However, it is important to also note the key role played by market

integration within the United States, with the price differential between Chicago and New

York falling more than the differential between New York and London. Furthermore, this

ignores the decline of price gaps between Midwestern farm gates and Chicago wholesale

markets. Turning form grain markets to manufactures, the United States during the nineteenth

century provides the classic example of a large economy industrialising behind a very high

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tariff wall. By 1913, the United States accounted for a lower share of world manufactured

exports than the United Kingdom, despite its GDP being more than twice as large.

Another alternative to full globalisation was integration within an empire through

restrictions on trade. Britain become the “Workshop of the World” during the Industrial

Revolution, gaining access to empire markets through the use of naval power and mercantilist

regulations, so that the share of Britain’s exports going to “British countries” increased form

16.1 percent in 1700/01 to 55.1 percent by 1772/73 and 74.3 percent by 1797/98 (Deane and

Cole, 1967: 87).1

6. A growing gap between developed and under-developed nations

Although Kuznets (1966: 359-399) did not provide a quantitative picture of the pre-modern

world, it is clear that he subscribed to a view of long run development that was common

amongst western economic historians at the time he was writing. In this view, Western

Europe and its offshoots in the New World was slowly building up a productivity lead over

the rest of the world during the early modern period, before an acceleration of the divergence

after the Industrial Revolution (Landes, 1969; North and Thomas, 1973).

This view was challenged during the 1990s by the “California School”, including

Wong (1997), Frank (1998) and Pomeranz (2000). Pomeranz, who coined the phrase “The

Great Divergence”, transformed the debate, emphasising the existence of rich and poor

regions within both Asia and Europe, and claiming that until 1800, living standards in the

richest parts of Europe were no higher than in the richest parts of Asia. Broadberry (2015)

draws on recent work in historical national accounting to narrow the difference between the

1 British countries are defined here as British islands (Ireland, Isle of Man and the Channel Islands), North

America, West Indies and East Indies.

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two views, establishing quantitatively the emergence of higher productivity and living

standards in North West Europe at the beginning of the eighteenth century. This timing of the

Great Divergence is later than the early sixteenth century, the old “Euro-centric” view, but is

still significantly earlier than claimed by Pomeranz (2000). Furthermore, it recognises the

importance of diversity within both the West and the Rest, with Little Divergences occurring

within both Europe and Asia in parallel with the great Divergence between the two

continents.

Europe’s Little Divergence, with the North Sea area economies of Britain and

Holland overtaking the Mediterranean economies of Italy and Spain, has already been

discussed. Although separate literatures exist on the decline of China from the Northern Song

through the Ming and Qing dynasties, and on the rise of Japan from the Tokugawa to the

Meiji periods, it is only recently that they have been combined to demonstrate the existence

of an Asian Little Divergence, with Japan overtaking China during the eighteenth century

(Broadberry, 2013). Although China was richer than England in 1086, it must be remembered

that England was a relatively poor part of Europe in the eleventh century. Comparing China

with the richest part of medieval Europe, it seems likely that Italy was already ahead by 1300.

However, care needs to be taken here, since a smaller region of China such as the Yangzi

Delta may still have been on a par with the most developed parts of Europe in 1500, which

would be consistent with the accounts given in the earlier, qualitative literature. This would

only require per capita incomes in the Yangzi Delta to have been around 60 per cent higher

than in China as a whole, which is broadly consistent with the scale of regional differences

within China during the nineteenth century (Li and van Zanden, 2012; Yan, 2011; Rozman,

1973).

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However, with the rise of Holland during its Golden Age, there are signs that the

Great Divergence was already getting underway during the sixteenth and seventeenth

centuries, since by this stage, the difference between the aggregates for China and Holland is

too large to be bridged by regional variation. It may be argued that Holland was too small an

area to be taken as evidence of a Great Divergence, but by the first half of the eighteenth

century the gap between Britain and China was also too large to be bridged by regional

variation, and the argument becomes even stronger if the whole of the North Sea area,

including the Netherlands and Belgium as well as Britain, is taken into consideration.

It is worth noting that Pomeranz (2011) recently accepted that his earlier claim of

China on a par with Europe as late as 1800 was exaggerated, and he now settles for the earlier

date of 1700 to 1750, which seems to be broadly consistent with the data in Table 8,

combined with a reasonable allowance for regional variation within China and India.

Although Japan was by this stage on a dynamic path of rising per capita GDP, in contrast to

the declining GDP per capita in China, this was not enough to stop the gap between Europe

and Asia from continuing to widen, since Japan was starting from a much lower level than

Britain and Holland, and continued to grow more slowly than these countries until after the

Meiji Restoration of 1868. However, it must be emphasised that although the gap between

Europe and Asia first became quantitatively significant during the first half of the eighteenth

century, its origins can still be seen as stretching back to the aftermath of the Black Death in

the mid-fourteenth century, after which the North Sea area economies of Britain and Holland

began to dampen growth reversals, so that the gain ion per capita incomes ushered in by the

demographic crisis were sustained.

IV. THE REVISED CHARACTERISTICS OF MODERN ECONOMIC GROWTH

21

In this section we provide a summary statement of the revised characteristics of modern

economic growth, arrived at inductively from the growing availability of quantitative

evidence on the long run growth process over the last millennium and presented in the

previous section.

1. Sustained growth of per capita product, with the ending of growth reversals

Kuznets was right to emphasise the growth of per capita product, but we now know that in

the early stages of modern economic growth, rates of increase were not particularly high.

What really mattered was the dampening and eventual elimination of periods of negative per

capita income growth, or growth reversals.

2. Demographic transition

The linking of growth of per capita product with substantial rates of population growth in

Kuznets’s first condition, although helpful in drawing a distinction between modern

economic growth and growth following episodes like the Black Death, neglected some

negative consequences of rapid population growth in the modern world. Although population

growth did increase with rising living standards during the early stages of modern economic

growth in many nations, high growth rates of per capita income came only later as birth rates

declined in line with death rates and societies went through a demographic transition.

Furthermore, the case of France demonstrates that there is no requirement for an acceleration

of population growth during the demographic transition. Similarly, the historical record

demonstrates that there is no requirement for high rates of TFP growth during the transition

to modern economic growth.

3. Sustained structural transformation from agriculture to services as well as to industry

Too much emphasis has been placed on industrialisation, while services have been relatively

neglected. We now know that services were an important part of the non-agricultural

22

economy earlier than was once thought and that the shift of labour from agriculture into

industry and services occurred over a longer period of time than was once believed. The

debate over Europe’s Little Divergence has brought about a reassessment of the role of

Holland as a dynamic service economy rather than a lagging industrial economy, and more

work is needed on services in Britain during the Industrial Revolution.

4. Institutional change: fiscal centralisation and parliamentary control

This condition, based on the work of North (1990), replaces the emphasis by Kuznets on

changes in the structure of society and its ideology. A new emphasis is placed on striking a

balance between the state being both strong enough to raise the revenue needed to provide

public goods and subject to sufficient parliamentary oversight to prevent arbitrary

interventions in business matters.

5. Market integration

This is more than a rephrasing of Kuznets’s condition of the opening up of international

communications, which ran into difficulties of generalising across the period of globalisation

between the 1820s and 1914 and the period of deglobalisation between 1914 and 1950. What

mattered was access to a sufficiently large market to allow the efficient utilisation of modern

technology. This could be achieved through globalisation, but also through integration of a

large national market behind protectionist barriers (as in the United States during the

nineteenth century) or integration of an empire through mercantilist restrictions (such as the

British Empire during the mercantilist era before the 1830s).

6. Great Divergence

The phrasing of Pomeranz (2000) is applied here to Kuznets’s condition on the emergence of

a growing gap between developed and under-developed nations. This also means accepting

his emphasis on regional variation within both Europe and Asia, with Little Divergences on

23

both continents. The gap between the two continents, even accounting for regional variation,

emerged in the first half of the eighteenth century, although its origins can still be traced back

to the dampening of growth reversals in northwest Europe from the late medieval period.

V. CONCLUSIONS

When Simon Kuznets first formulated his famous six characteristics of modern economic

growth, there was very limited quantitative information available on the performance of

economies during the early stages of the modern era, and nothing on the pre-modern period.

This paper draws on the recent work by quantitative economic historians on long run

economic growth to reassess the characteristics of modern economic growth. Although this

can be seen largely as an inductive exercise, it is certainly not what Koopmans (1947)

criticised as “measurement without theory”, since many of the data have been collected as a

result of theoretical advances, including unified growth theory and new institutional

economics. The approach taken here builds on the belief that new empirical findings from

economic history can strengthen arguments beyond a reliance on introspection and the

deductive approach.

The most important changes from the six original characteristics of Kuznets concern

the incorporation of new work in the following areas: First, the transition to modern

economic growth was at first slower than Kuznets believed, and was the result not so much of

an increase in growth rates during booms, as of a dampening of growth reversals. This

remains a problem for under-developed countries today. Second, whilst recognising that

economic growth accompanied by declining population growth should not be seen as modern

economic growth, it is important to recognise that by the twentieth century, rapid population

growth was becoming associated with poverty These first two characteristics are concerned

24

with aggregate growth, while the third and fourth characteristics are concerned with structural

transformation.

Third, an important aspect of the structural transformation noted by Kuznets in the

transition to modern economic growth is the growing importance of services, as well as

industry. Existing accounts focus too heavily on industrialisation, neglecting the role of

services, and also placing too much emphasis on the rapidity of structural change, rather than

its drawn out nature. Fourth, institutional change is required, particularly in the role of the

state, which involves a balance between being strong enough to raise sufficient taxes to

provide public goods, without being so strong as to undermine incentives for investment and

innovation through arbitrary actions.

The final two characteristics are concerned with the international spread of modern

economic growth. Fifth, modern economic growth required access to a sufficiently large

market to allow the efficient utilisation of modern technology. This could be achieved

through full globalisation, but also through the integration of a large national market behind

protective barriers or the integration of an empire within a mercantilist system. Sixth, despite

the high degree of heterogeneity within both Europe and Asia, the Great Divergence of

productivity and living standards between the two continents became quantitatively

significant during the first half of the eighteenth century, and its origins can be traced back to

the dampening of growth reversals in the North Sea area from the late medieval period.

25

TABLE 1: GDP per capita levels in Europe (1990 international dollars)

England/

GB

Holland/

NL

Italy Spain

1086 754

1270 759 957

1300 755 1,482 957

1348 777 876 1,376 1,030

1400 1,090 1,245 1,601 885

1450 1,055 1,432 1,668 889

1500 1,114 1,483 1,403 889

1570 1,143 1,783 1,337 990

1600 1,123 2,372 1,244 944

1650 1,100 2,171 1,271 820

1700 1,630 2,403 1,350 880

1,563

1750 1,710 2,440 1,403 910

1800 2,080 2,617 1,244 962

1,752

1820 2,133 1,953 1,376 1,087

1850 2,997 2,397 1,350 1,144

Sources and notes: England/Great Britain: Broadberry et al. (2015a); Broadberry and van

Leeuwen (2011); Holland/Netherlands: van Zanden and van Leuwen (2012); Italy: Malanima

(2011); Spain: Álvarez-Nogal and Prados de la Escosura (2013). Figures are for 10-year

averages starting in the stated year (i.e. 1270-79, 1300-09,…) apart from 1348, which refers

to the pre-Black Death years 1339-48.

26

FIGURE 1: Real GDP per capita in the North Sea area and Mediterranean Europe,

1270-1870, (1990 international dollars, log scale)

A. Italy and Spain

B. Britain and Holland

C. The North Sea area and Mediterranean Europe

Sources: Malanima (2011); Álvarez-Nogal and Prados de la Escosura (2012); Broadberry et

al. (2015a); van Zanden and van Leeuwen (2012).

27

FIGURE 2: Vital rates in Sweden, England and France, 1681-2000 (crude birth rate

and crude death rate per 1,000 population)

A. Sweden (decadal averages)

B. England (annual data)

C. France (annual data)

Sources: Swedish Central Bureau of Statistics (1969), Historical Statistics of Sweden, Part 1.

Population, (second edition, 1720-1967), Stockholm; World Bank (2015); Wrigley and

Schofield (1981); Mitchell (1988); UK Office for National Statistics,

http://www.ons.gov.uk/ons/index.html; Henry and Blayo (1975); Dyson and Murphy (1985).

28

TABLE 2: Accounting for British GDP growth, 1700-1860 (% per annum)

Output

growth

Due to

capital

Due to

labour

TFP

growth

1700-1760 0.70 0.35 0.15 0.20

1760-1801 1.00 0.50 0.40 0.10

1801-1831 1.90 0.85 0.70 0.35

1831-1860 2.50 1.00 0.70 0.80

Sources and notes: derived from Crafts (1985: 81); Crafts and Harley (1992: 718); Harley

(1993: 198). All calculations are on a 2-factor basis, with capital and labour weighted

equally.

TABLE 3: Accounting for British GDP growth, 1760-1913 (% per annum)

A. Traditional growth accounting

Output

growth

Due to

capital

Due to

labour

Due to

human

capital

TFP

growth

1760-1780 0.60 0.25 0.35 0.00

1780-1831 1.70 0.60 0.80 0.30

1831-1873 2.40 0.90 0.75 0.75

1873-1899 2.10 0.80 0.55 0.75

1899-1913 1.40 0.80 0.55 0.05

B. Augmented-Solow growth accounting

Output

growth

Due to

capital

Due to

labour

Due to

human

capital

TFP

growth

1760-1780 0.60 0.25 0.20 0.10 0.05

1780-1831 1.70 0.60 0.45 0.45 0.20

1831-1873 2.40 0.90 0.45 0.70 0.35

1873-1899 2.10 0.80 0.30 0.50 0.50

1899-1913 1.40 0.80 0.30 0.50 -0.20

Sources and notes: Crafts (1995: 752). Weights are 0.4 for capital, 0.35 for labour and 0.25

for human capital.

29

TABLE 4: Accounting for Dutch GDP growth, 1540-1800 (% per annum)

Output

growth

Due to

capital

Due to

labour

Due to

human

capital

TFP

growth

1540-1620 1.92 0.62 0.37 0.29 0.64

1620-1665 -0.18 0.30 0.24 0.32 -1.04

1665-1720 0.08 -0.10 -0.01 0.14 0.05

1720-1800 0.04 0.09 -0.11 -0.03 0.09

Sources and notes: Derived from van Zanden and van Leeuwen (2012: 126). Weights are 0.4

for capital, 0.35 for labour and 0.25 for human capital.

TABLE 5: Occupational shares in Britain, 1381-1851

1381 1522 1700 1759 1801 1851

Agriculture 57.2 58.1 38.9 36.8 31.7 23.5

Industry 19.2 22.7 34.0 33.9 36.4 45.6

Services 23.6 19.2 27.2 29.3 31.9 30.9

Total economy 100.0 100.0 100.0 100.0 100.0 100.0

Source: Broadberry et al. (2015a: 344).

30

TABLE 6: Per capita fiscal revenues, 1500/09 to 1780/89 (grams of silver)

1500/09 1550/59 1600/09 1650/59 1700/09 1750/59 1780/89

Dutch Republic 76.2 114.0 210.6 189.4 228.2

England 5.5 8.9 15.2 38.7 91.9 109.1 172.3

France 7.2 10.9 18.1 56.5 43.5 48.7 77.6

Spain 12.9 19.1 62.6 57.3 28.6 46.2 59.0

Venice 27.5 29.6 37.5 42.5 46.3 36.2 42.3

Austria 10.6 15.6 23.0 43.0

Russia 6.3 14.9 26.7

Prussia 2.4 9.0 24.6 53.2 35.0

Ottoman Empire 5.6 5.8 7.4 8.0 9.1 7.1

Poland 1.5 0.9 1.6 5.0 1.2 0.8 11.2

China 7.0 7.2 4.2 3.4

India 11.1 17.4 21.9 17.6 5.5

Source: Europe: Karaman and Pamuk (2010: 611); China: Brandt et al. (2014: 69); India:

derived from Broadberry et al. (2015b).

TABLE 7: Activity index of European parliaments, 12th to 18th centuries (calendar years

per century in which parliament met)

12th 13th 14th 15th 16th 17th 18th

North Sea area

England 0 6 78 67 59 73 100

Scotland 0 0 10 61 96 59 93

Netherlands 0 0 0 20 80 100 100

Mediterranean

Castile and Leon 2 30 59 52 66 48 7

Catalonia 3 29 41 61 16 14 4

Aragon 2 25 38 41 19 11 1

Valencia 0 7 28 29 12 4 0

Navarre 2 7 17 33 62 30 20

Portugal 0 9 27 47 12 14 0

Source: van Zanden et al. (2012: online appendix S1).

31

FIGURE 3: Trans-Atlantic wheat price differentials, 1870-1913 (British price – US

price as % of US price)

Source: O’Rourke and Williamson (1999: 46).

32

TABLE 8: GDP per capita levels in Europe and Asia (1990 international dollars)

England/

GB

Holland/

NL

Italy Spain Japan China India

725 551

900 476

980 861

1020 1,014

1060 990

1086 754 886

1120 871

1150 508

1280 679 957 552

1300 755 1,482 957

1348 777 876 1,376 1,030

1400 1,090 1,245 1,601 885 1,025

1450 1,055 1,432 1,668 889 552 982

1500 1,114 1,483 1,403 889 851

1570 1,143 1,783 1,337 990 878

1600 1,123 2,372 1,244 944 605 857 682

1650 1,110 2,171 1,271 820 619 638

1700 1,563 2,403 1,350 880 597 1,096 622

1750 1,710 2,440 1,403 910 622 723 573

1800 2,080 1,752 1,244 962 703 613 569

1850 2,997 2,397 1,350 1,144 777 600 556

Sources: European countries from Table 1; Japan: Bassino et al. (2015); China: Broadberry et

al. (2015c); India: Broadberry et al. (2015b).

33

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